As we will talk about this week and next week, contributing to retirements plans is a great way to provide yourself with a secure future. The earlier that you get started, the better off that you will be done. But today, I want to talk about the other end of the spectrum. This is when the IRS requires you to start to take money out of your retirement plans. I think there is still some confusion in this area and the rules recently changed.
Let’s start by when do people need to start to take distributions?
- You are actually starting with a fairly complex question.
- Assuming that you are not still working, here are the rules which just changed late last year.
- In 2023, a person needs to start taking their Required Minimum Distributions when they turn 73.
- Prior to 2023, the RMD age was 72.
- So if you were 72 in 2022, you needed to start taking RMDs in 2022.
- But if you were 71 in 2022, then you do not need to start taking RMDs until 2024.
- Those 72 year olds in 2022 need to continue to take their RMDs since they fall under the old rules.
You just said these are the rules for someone not working. What about someone who is still working?
- You caught that. So the RMD rules for IRAs are what we just talked about, but there are different rules for those with qualified plans like 401k and 403b’s that are still working.
- In this case, a person can delay taking their RMD’s from those qualified plans while they are still working for the company that sponsors that plan. You do have to take RMD from other 401k/403b plans.
- This rule does not apply to people who own more than 5% of the business for which they are working.
Do you have to take the RMD by December 31 each year?
- In general yes, but in the year you turn 73, you have until April 1 of the following year to take out the RMD.
- But this is generally not advisable because if you do this you will need to take two withdrawals in that year – one for the previous year and one for the current year.
How does the Required Minimum Distribution get calculated?
- This calculation is pretty straightforward since the IRS gives you a table.
- For most people the RMD is based on the balance in your retirement account at December 31 of the previous year divided by a factor on an IRS table.
- In the year you turn 73, the table amount is 26.5. This means that the December 31 balance would be divided by the 26.5 amount. So if you have $100,000 in your retirement account divided by 26.5 would be $3,774.
- This table amount decreases each year, so in the year you turn 90, the table amount is 12.2. A person with $100,000 in their retirement would need to withdraw $8,197.
- Many websites have nice calculators to assist.
What are the penalties for not taking a RMD?
- This penalty is pretty high.
- It is 50% of the amount that you should have taken out.
- So just remember as you get into your 70s to make sure you have a plan for withdrawing the proper amounts to avoid this penalty.
And lastly, we talked about how people can transfer from their IRAs directly to charity. How does this affect what we just talked about?
- This is the Qualified Charitable distribution that allows people over age 70 ½ to make donations directly to charities which can save taxes.
- Any of these QCD amounts will reduce the amount of the Required Minimum Distribution, so it is a double win.
Be sure to talk to one of our professionals if you have any questions regarding taking required minimum distributions from retirement plans.